Cognizant's strategy of focus on sustainable growth pays off

ET BureauNov 4, 2009, 11.30am IST

BANGALORE: The company decided to focus more on sustainable business growth instead of chasing better margins than others. "Cognizant took an approach of working with and committing to a 19-20 % operating margin target, (before stock compensation expense) intending to reinvest the excess back into the business.

Unlike Infosys, it believes that a trade-off between margins and growth is present and will play out in the medium to long term," Edelweiss analysts Viju George, Kunal Sangoi and Pratik Gandhi said in a September report.

This approach is paying off. Cognizant reported revenues of $853.5 million during the September quarter, up 16% annually. The company saw a net headcount addition of 3,900 during the third quarter, taking the total headcount to 68,000.

Cognizant outperformed the consensus estimate of 21 analysts who predicted an average revenue of $805.1 million for the third quarter as well as its own guidance of 3% sequential revenue growth at $800 million.

"Clients, who have come to rely on us to help them achieve operational efficiencies, are now increasingly approaching us to serve as a consultative business partner as their industries face comprehensive upheavals from the recession and secular shifts resulting from new technologies and other market forces," Mr D'Souza said.

When UBS, Switzerland's biggest bank by assets, wanted to sell its India back office and bundle the transaction with a multi-year outsourcing contract, TCS, Wipro and Infosys along with Cognizant bid aggressively. Eventually, Cognizant won the deal because of its long association with the decision-makers at UBS.

"Valuation was never too much of a concern for anybody. What really swung the deal for Cognizant was their relationship with UBS and the comfort they had," said a senior official at one of the tech firms that lost out.

In a period when new business was tough to come by, Cognizant acquired UBS' India captive for around $75 million along with a five-year outsourcing contract worth up to $442 million. For Cognizant, sharp focus on the financial services vertical has been fetching rich dividends, especially compared to TCS, Infosys and Wipro.

On a run-rate basis in a difficult environment, Cognizant is adding more revenue per quarter from banking, financial services and insurance (BFSI) clients than its larger rivals. Between October 2008 and June 2009, Cognizant cumulatively added $56 million in revenues in BFSI compared to the preceding three quarters. During this period, revenue from BFSI for Infosys and TCS fell by $88 m and $43 m, respectively.